Subchapter S Corporation (S Corp)

What is a Subchapter S Corporation (S Corp)?

A Subchapter S corporation, also known as an S corp, is a specific type of corporation; the other type is a Subchapter C corporation. In a nutshell, an S corp provides all the advantages of a corporate business structure while allowing the profits and losses to pass through to the shareholder(s), just as in an LLC or partnership.

A corporation is a form of business that is owned by its shareholder(s) and which assumes liability for the actions and finances of the business – the shareholders cannot be held responsible. Being able to shift liability away from the owner and onto the business itself is a major advantage.

Eligibility

Corporations can be established by individuals or companies. Some of the restrictions of an S corp include:

No more than 100 shareholders

Only U.S. citizens can be shareholders

Can only issue common stock

Pros

For many years, the Subchapter S corporation was the preferred business structure for small business owners because they provide the liability protection of a corporation with the pass-through taxation of LLCs and partnerships. Other advantages include:

The existence of the company does not expire, as an LLC’s can

One person is able to form a Subchapter S corporation

Ownership interests are transferable

Only the wages of an employee are subject to the 15.3% self-employment tax, other benefits and bonuses are excluded

Cons

There are disadvantages, too, however, which include:

The need to create and file the same paperwork as a Subchapter C corporation, such as Articles of Incorporation, keeping corporate minutes, scheduling board of director meetings and shareholder meetings, and providing a way for shareholders to vote on corporate issues.